Episode 29
Go-to market strategy for year-on-year sales growth
Category : Sales & Distribution
In the last episode, we had discussed about the last mile obstacle in any typical retail environment, responsible for companies hitting a glass ceiling after achieving an initial jump in revenue and profitability by abandoning "push" mode of sales and implementing pull-based replenishment systems. We had also promised to share the solution to this obstacle so that companies can have a continuous and ever-flourishing growth model. So, this episode is dedicated to exploring this revolutionary solution for the retail environment. For a recap of the "pull" mode of sales and how it leads to a big sales jump read – https://www.vectorconsulting.in/research-publications/consumer-goods-and-retail/the-road-less-travelled/
Transcript
| Shubham Agarwal : | Hello, and welcome back to the counterpoint Podcast. I’m Shubham Agarwal. And as we had promised in the last episode, we are here with Sunil again to reveal the, you know, the revelation episode for the retail environment to demystify the last mile obstacle for really conquering the width and depth of distribution. So, in the last episode, we discussed about the last mile obstacle. And for anyone of you who has not had a chance to listen to these episodes, you could please check out before you go on with this one. To give you a quick recap, though, from our previous episode, we talked about the inherent potential that exists from last a large majority of the distribution companies in India considering the footprint and the headroom to grow. like we had discussed in the last episode as well. If it takes 50% growth rate, you know, a CAGR should become a 4000 Crore company in a five year period. Right, that too, with the higher profits, increasing profits and profitability, Now the pull based replenishment system, which helps to achieve near 100% availability, coupled with the market injections of releasing the bandwidth of sales team, from audit taking to reach expansion, range addition and issue resolution. Now deploying the tele calling set up for the order taking, and using the machine learning intelligence to guide both the tele callers and the field sales team to reach the right retailers at the right time for the right purpose. So this all this literally sets a virtuous loop of growth and organizations see unprecedented exponential growth for two to three years. But still a plateau is seen and the growth story doesn’t seem to continue at the same trend, which is what we ended our discussion with what really causes that without attributing it to conjecturing and conspiracy theories, what we will discuss today and look for the holy grail of the retail environment. So let’s welcome Sunil again. Hi, Sunil, welcome once again, |
| Sunil Davis : | Thank you, Shubham. And as always it’s a pleasure. And hearing your recap, I kept wondering, when are we going to bring the mathematical equation into picture? |
| Shubham Agarwal : | I promise you, I’m not going to leave you on that. For all our listeners, once again, what I thought is an exaggeration seems to be an achievable reality, say, you know, a 500 Crore company |
| Sunil Davis : | And we will address this Shubham for sure. And that’s what I think we’ll start with, by the way, any work on the thinking part? |
| Shubham Agarwal : | Yeah, definitely, I think not just me, in fact, which is, it’s always great to hear from our listeners, you know, because when whenever they write back after an episode, it tells you the real value that they are taking out of that episode, right. And our listeners also seem to have given quite a bit of thought, various thoughts and responses. And if I, if I were to summarize it all, it kind of boils down to efficacy of execution, you know, the implementation is the real key, right, and the gaps due to dropping of the ball at various links, either by the company itself, or the sales team, you know, or the distributor or anyone in the chain, who just refuses to go beyond a certain level is what people have written us backwards. |
| Sunil Davis : | In fact, there is no denying if you asked me on the discipline of execution, but very often that, you know, this statement is good. I mean, and it is a fact. But there are good indicators telling you that there is a deeper reason that exist. |
| Shubham Agarwal : | Okay. And would you like to explain what what that is? |
| Sunil Davis : | See, how often have you heard this, you know, a distributor is not interested to add new retailers, you must have definitely come across these statements. Right. |
| Shubham Agarwal : | Yeah, in fact, in the project that I am on as well, you know, we reach out to the distributors, and their only worry is the fear of payment getting stuck. |
| Sunil Davis : | Yeah, in fact, you know, that’s how the distributors say the ˆJitni yaari utni udhaari” . So yeah, this this problem, which distributors keep saying and they kind of, you know, mentioned this, but we know this is addressable, right? |
| Shubham Agarwal : | Right. Yeah, that’s what so we can address this Yeah, |
| Sunil Davis : | So, if we can address this and still this obstacle comes up see if this addressing and this obstacle was disappearing, you would not have come across these statements so commonly, so finally, there is what we call as the capital becomes a constraint and the distributor tries to maximize within the capital at his disposal. |
| Shubham Agarwal : | Okay, so that’s right. And we use the rhetorical like “Rone ke liye ek kandha or sunne ke lie ek banda”, if you have that, then the problem is solved. |
| Sunil Davis : | Yeah, in fact, okay. I don’t undermine the power of your statement and the need to keep talking in retail environment. Yes, we have to talk but we are not solving the underlying conflict, see, don’t you feel there is an unresolved issue due to which this obstacle hits you again and again. |
| Shubham Agarwal : | That’s right Sunil. So what is that? What is that? |
| Sunil Davis : | Okay, again a straightforward question. Okay. For this, let’s examine the supply chain. See when you okay, can you verbalize the distribution company, or typical supply chain of a distribution company? |
| Shubham Agarwal : | Yeah, definitely. So I think the one that we discussed the last week as well, we talked about a mid sized distribution company. Let’s say we have 15 to 25. regional distribution centers or RDC’s, who are further serving to about 300 on the lower side to about 2000 distributors on the highest side, and who are in turn serving to about one lakh on the lower side again, and 10 lakh to the higher side retailers, number of retailers basically. |
| Sunil Davis : | So Shubham this supply chain, which you mentioned, and this link, which you mentioned in this the last mile is namely, the last entity I’ll call it is the retailer. And if you look at this retailer, in the supply chain the way you described, the retailer has multiple sources to purchase the same product. Apart from that nominated distributor, a retailer can purchase say from a direct dealer, he can have a cash and carry operator, a wholesaler, or now there are various aggregators and E commerce outlets reaching out to these retailers. And not just the brand and the company which has implemented the supply chain. But the competition also has similar number of entities and similar number of channels, giving retailer a multiple choice of sources from where they can fly in each territory. And when I say a wholesaler, they can be like four or five wholesalers in sub territory. So there are multiple choices available. |
| Shubham Agarwal : | Now you’re right, Sunil, I think, in fact, in our experience, also across all projects, we I think whenever we reach out to the retailers, they say “maal to mil hi jaata hai”. So I think the retailer does have a choice. The retailer very well knows and understands you know, that the majority of his consumers are brand agnostic as well. |
| Sunil Davis : | Yeah, that’s a very important point. See, the choice which the retailer has his about like, you know, he knows very clearly, not just the brand, but from the various competition brands, he can shuffle and he can even change the combination. Now, look at it. Shubham, I’d like to give you like a Kaun Banega Crorepati style four options, this entity called a retailer, when does he pay the distributor? Option A, when the payment is due, as per the credit terms, Option B, when the retailer sells a product given to him, Option C when the retailer has money, And option D when the retailer wants to buy again from the distributor? |
| Shubham Agarwal : | Do we have a lifeline now that you’ve made into a KBC? |
| Sunil Davis : | Okay, I’m like your host and your friend, but if you want it, I will reduce it to two options. Do you want that? |
| Shubham Agarwal : | So I think from the retailer’s perspective, obviously, I guess it’s the last option when the retailer wants to buy again, is when he would, you know, be willing to pay for the last time? |
| Sunil Davis : | Yeah, and that’s the right answer, sahi jawab, I would say, but yeah, so a typical retailer goes with his preferred source, but time to time, they stress the credit, and when they would like to stress the credit, and therefore they keep changing the source from where they’re buying, because what you rightly said, retailer knows, he has to pay when he has to buy again from the distributor. So, therefore, he tries kind of like you know, various sources from where he can keep buying and every time when he changes the source, he is extending the credit that is available to him. And this element can also help him by going to a different brands time to time changing the shelf share and all that fact. So now, to this reality of extending the credit, what really happens is when the retailer is ready to give cash for a purchase, he does get an additional two to four discount an additional discount of two to 4%. Now this is what we call it in the market parlance as the cash discount. Now a smart businessman retailer knows he has this choice, a clear gain of 2% or 3% on the cash transaction, plus, extending the old payment by 30 days is another 1 to 1.5% gain from a retailer’s perspective, right so the action of a retailer clearly validates the symptoms and the distributors experience we talked about. |
| Shubham Agarwal : | But this doesn’t sound like rocket science. I mean, with anyone who has some experience will be able to decipher this and you know, you’re basically saying a clear percentage, clear advantage of about 3 to 4%, I think, but isn’t that obvious? |
| Sunil Davis : | Yeah in hindsight is very obvious. And if you look at it, the companies have tried to address this by giving cash discounts, sometimes there are schemes all the elements are addressed or rather offered, so that you know, they can address this issue, but the only trouble is, every time a company tries to give this we clearly know the source which gets the same whether it is a wholesaler or distributor, they pass on to the market, end of the day, the retailer still has that additional discount plus that three to 4% gain, which he can play around by choosing to you know, make this various sources or various distributors or a wholesaler sometimes cash and carry model sometimes, this changing the source gives him that experience irrespective of the schemes offered by the companies. |
| Shubham Agarwal : | Right? Do we have any validated data for the impact of this behavior? |
| Sunil Davis : | Yeah, here comes a mathematician in you. I would say like this. In fact, just to understand and to gauge this impact, we had done a study across the various retail environments and the various distributors, whom we know very well, we tried to study what we call as the trend of the debtor days over a timescale. When I say timescale, we took a four year period. And one clear trend was the debtor and the debtor days has constantly increased, the sales must have grown like you know, around 6% 10% CAGR. But that debtor days group from I mean, one of the environments, which we know very well, the hosiery environment, it grew from 75 days to 180 days. And this doubling or tripling, on the debtor days, was commonly seen over a four year period, across various environments, and one distributor very clearly verbalize this also, he said, this is a one way traffic signal. Once you are commenced, it only increases, maybe it is a slow slide, but it is always an increasing, you know, increasing trend. So this is the reality that we are looking at. |
| Shubham Agarwal : | Yeah. I mean, the reality between the distributor and the retailer, also, you know, that mirrors between the company and the distributor, is it? |
| Sunil Davis : | Absolutely, absolutely. and look at it, I mean, companies also say mera distributor ka standing increase, ho raha hai attribute it to something in the market, they do a correction companies do a correction, you know, by giving an extra discount, or, you know, writing off certain elements and overall the cost increases. |
| Shubham Agarwal : | Right? No, it kind of looks like the retailer plays the Russian roulette with the distributors. I mean, you just need to solve this and design a win win proposition, I think but isn’t it important for the company, and of course, the distributor as well to break the chain of downward spiral of the debtor days. |
| Sunil Davis : | Yes, you’re right, you’re right, when you say we needed design to have a win win proposition, and remembering giving a scheme won’t help since it will be passed on. And retailer, will still have a choice. And as long as the retailer has a choice, he will use that choice as a smart businessman. |
| Shubham Agarwal : | Right, so I’ll have a direct question again. What is the wayout? |
| Sunil Davis : | Okay, see a way out is very simple. The retailer has a benefit of 2 to 4%. Right? So just give it to him. That’s the end of the story. Isn’t it simple? |
| Shubham Agarwal : | No, I think the question is how since you have put the condition that you know, given just as scheme is not tenable. |
| Sunil Davis : | Okay. So, we now come to the revelation part, see the retailer, if you look at it, a retailer does not easily get credit from the formal banking channel and unsecured creditor and informal sources of funds implies a high cost of capital which is around 18 to 24% in our environment in India. So, no wonder a retailer exercises his choice to extend the credit by switching the source. Now companies can use what we call it as a channel finance to extend the credit not just to the distributor, but onboarding the retailer on the same channel finance platform. So, if you look at it in India, and typically the working capital costs for a corporate is like 8 to 9% for a distributor it is like 11 to 12% and a retailer is like 17 to 18% and why is it so the lower down the link, that much unsecured is from the banking definition a retailer is an unsecured kind of like entity from that perspective. The charges are high the higher the risk the higher the charges with the banking channel will deploy. Now, if the second level of extending the corporate rate, a 9% rate which a corporate enjoys, if it can be extended to the distributor retailer link. Imagine how big a game changer that is a retailer was paying 18 to 24% now gets at 8 to 9%. This is the game changers that we are looking at |
| Shubham Agarwal : | This is really, really interesting. And I believe it’s it’s rarely done because of the risk or the credit worthiness, right. |
| Sunil Davis : | Yes from a banking parlance, the risk and the credit worthiness is high. But look at it. Today, if a corporate gives what is called as 100% FLDG the first loan default guarantee, then the funny part is the risk is anyway already taken both by the company and its distributors. It is an entity with they have been dealing not just for decades, sometimes for generations and they are giving the material on credit right. The risk is anywhere taken there is no extra risk. So if a company says to the financial institute, well, I am ready to put my neck on the anvil and guarantee you 100% FLDG asset called it then the business of lending which is by the financial institute, there are more than happy to do it. In fact, recently one of my clients have secured this channel finance for his company channel at 7.4% per annum, which means what is 0.6% per month. That’s so now the new way of channel finance is all about sign with the complete link on the corporate rate. This is called as a pull based channel finance because the day you invoice, the invoicing entity gets a payment and the other entity gets this excellent rate of credit. So each link commensurate to the current reality gives what I call it as an cash discount upfront in the bill. For example, in my current reality, if the distributor is already incurring a 90 days credit period, he goes and tells to the retailer boss hum 30 din bolte hai ap 90 din lete ho chalo, let’s agree today it is the reality I am giving you an upfront a 1.8% cash discount in the bill. Now 1.8% stands for 0.6% per month right. So, this 1.8% given us upfront the channel partner or the retailer now sees he has a freedom of choice, he can choose either to take the cash discount given to him or the 90 day credit period which is already built in as per his need, he can make the choice and by the way, if there is a real crunch for cash or some issue happens, the retailer now also gets another 30 days or 60 days further credit at a corporate rate of 0.6% per month, which is kind of like you know, a dream come true as far as the retailer is concerned, so he doesn’t have to worry about how to secure the next you know possible cash or the worry about the capital just vanishes and for the corporate it is the stopping of the downward spiral of the debtor and debtor days. Now of faster cash conversion cycle at no extra risk and at no extra costs from the current scenario is what this entire game gives you. So, importantly, if you look at it, it ensures the money flow for the company in its favor and the fintechs platform and the banking channel ensures that there are proper reminders being given daily you know, saving shown to the retailer ki aaj aapne dediya to aapko itna fayda hoga, because there is a CD which has to be kind of like you know, maximized if he wants to pay and the best part is the transactions become seamless and the flow of money is in the company’s favor |
| Shubham Agarwal : | This is a this is wonderful, because the you know this this looks like guaranteeing the flow of money basically in the channel. |
| Sunil Davis : | And this is such an important point see, traditionally we have looked at sales as a supply chain solution and assume that same rules of supply according to consumption can be implemented at every link because if you have the information flow, then the material flow can mimic it however, when it comes to a mom and pop retail outlets Kirana outlets, there is an additional element that has never bothered the supply chains much, the flow of money. So even if information is flowing, material flow may not happen because money flow has not happened. And companies have shied away from thinking ki yeh to distributor ka problem hai iske liye hi to distributor ko khada kiya hai, but this problem unless you solve the constraint of credit if it is not resolved the last mile is never going to come under your control. So if you do it using this channel finance, it helps the retailer to get the benefit of having a formal banking channel and the flexibility of enjoying either the CD or the credit as per his need. |
| Shubham Agarwal : | Right, now he has a much better choice, I think, and this will also ensure, you know, continuous buying and guaranteeing the growth of the wallet share as well, because from the retailers to whichever company whosoever provides this facility |
| Sunil Davis : | You’re right actually see, if somebody is giving this what I call it as a dream come true. Then you can do your maths now, see every year with the growing capability of the company to scale up, you know, to double the retailer base like two lakhs to four lakhs, four to eight lakhs, eight to 16 lakhs and this mechanism of last mile obstacle of credit being resolved, helping not only guaranteeing the wallet share, but also increasing range potentially gives every company option of growing say what you rightly said, a 50% growth on a CAGR of four years. And this journey which takes around five to seven years to cover the width and depth of India, the 750 odd districts of India will likely give you the 4000 crores that 4000 crores can even next year, in the fifth year, sixth year becomes 6000 and 9000 respectively. So that is the power that that is the power of the solution, once this obstacle is resolved. |
| Shubham Agarwal : | This sounds like a like a revolution in the retail environment. I totally believe it now, because I think this particular aspect of supply chain has never been looked before at such depth I think by organizations. |
| Sunil Davis : | Yeah, right, In fact, it’s honestly a journey which has just started. And I call it a total peace of mind for a retailer and in a way. It is like cleaning the dark underbelly of today’s informal channels and all the you know, wishy wishy things which happen out there. I call it a social capitalism at his best. |
| Shubham Agarwal : | Wonderful I mean, this is truly overwhelming. And I always thought that you know, these were only concepts that you read in the textbooks and could never be implemented on the on the field. But looking forward to this journey, and I think it’s going to help a lot of our listeners as well. Let’s let’s leave at this thought for the listeners to further delve upon, write to us. Any any closing remarks, Sunil |
| Sunil Davis : | See there is a world to be conquered out there and just the thinking is required and a win win thinking is what I call it. So that you know you can really grow and people believe you know, growth at 50% growth at 40% for a CAGR of like you know five years six years is just not possible. Actually, it is all it requires to really be in the win-win thinking where every link in the chain enjoys a win. And if that can be done and that can be ensured. Then this last mile obstacle as I call it, is there to be resolved. Yeah, there are few companies which are started this journey. So in the coming few years, there is gonna be a lot more in this space. And this space is really, really heating up. |
| Shubham Agarwal : | That’s extremely exciting, I think and that also gives us faith on the entire solution and the model. For all the listeners if you have any doubts or concerns as usual, you can write to us and you can find the links to a lot more articles on this topic in the details to this episode. Until next time, this is Shubham signing off. Thank you, Sunil. |
| Sunil Davis : | Thank you. Bye |
| Shubham Agarwal : | Bye bye |
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10th floor, Thane One, DIL Complex,
Ghodbunder Road, Majiwada,
Thane (West), Maharashtra - 400610, India.